What Is a Bank Reconciliation Statement, and How Is It Done?

Compare the balance sheet’s ending balance with the bank statement’s ending balance. When your business issues a cheque to suppliers or creditors, these amounts are immediately recorded on the credit side of your cash book. However, there might be a situation where the receiving entity may not present the cheques issued by your business to the bank for immediate payment. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed). When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions.

Bank reconciliation statements ensure that payments were processed and cash collections were deposited into the bank. Bank reconciliation statements are often used to catch simple errors, duplications, and accidental discrepancies. A bank reconciliation statement can help you identify differences between your company’s bank and book balances. The bank will debit your business account only when they’ve paid these issued cheques, meaning there is a time delay between the issuing of cheques and their presentation to the bank. If your bank account, credit card statements, and your bookkeeping don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business. This can also help you catch any bank service fees or interest income making sure your company’s cash balance is accurate.

To see your business as it really is

These cheques are the ones that have been issued by your business, but the recipient has not presented them to the bank for the collection of payment. Not-sufficient funds (NSF) refers to a situation when your bank does not honour a cheque, because the current account, on which the cheque is drawn, has insufficient funds. More specifically, you’re looking to see if the “ending balance” of these two accounts are the same over a particular period (say, for the month of February). We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task. Once you’ve completed the balance as per the bank, you’ll then need to work out the balance as per the cash book.

To reconcile your bank statement with your cash book, you’ll need to ensure that the cash book is complete and make sure that the current month’s bank statement has also been obtained. Such errors are committed while recording the transactions in the cash book, so the balance as per the cash book will differ from the passbook. At times, the balance as per the cash book and passbook may differ due to an error committed by either the bank or an error in the cash book of your company. At times, your customers may directly deposit funds into your business’ bank account, but your business will not notified about this the bank statement is received. The reconciliation statement allows the accountant to catch these errors each month. The company can now take steps to rectify the mistakes and balance its statements.

Accounting Services

If there are any differences between the bank statement and the balance sheet, cross-check to identify the mistake’s source. If transactions on the bank statements are correct, you need to adjust your books. After identifying the reasons your bank statement doesn’t match accounting records, you have to update your records. If the bank has made errors, notify them so that they correct the transactions. As for outstanding checks, you’ve recorded them in the books, but they haven’t cleared in the bank account. You need to deduct the check amounts from your bank balance to decrease it so that it reflects the balance of your cash book.

Performing immediate bank reconciliations for large cash amounts or suspicious transactions further increases your ability to catch fraud and error. Keeping on top of your bank reconciliation ensures that you’re always aware of your company’s financial situation. This helps you anticipate any cash flow challenges so you can respond appropriately. Financial accuracy is also important for ensuring that all payments have been fulfilled and orders have been completed. Greg adds the $11,500 of deposits in transit to his bank statement balance, bringing him to $99,500. He also subtracts the $500 in bank fees from his financial statement balance, bringing him to $99,500 and balancing the two accounts.

Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid). Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening. Since you’ve already adjusted the balances to account for common discrepancies, the numbers should be the same. Book transactions are transactions that have been recorded on your books but haven’t cleared the bank.

What are the two items used to reconcile a bank account?

You will know about this only when you receive the bank statement at the end of the month. As a result, your balance as per the passbook would be less than the balance as per the cash book. In this instance, your bank has recorded the receipts in your business account at the bank, while you haven’t recorded this transaction in your cash book. As a result, the balance shown in the bank passbook would be more than the liability balance shown in your company’s cash book. The purpose of preparing a bank reconciliation statement is to reconcile the difference between the balance as per the cash book and the balance as per the passbook.

How often should you reconcile your bank account ?

1. When they draw money from your account to pay for a business expense, they could take more than they record on the books.
2. After including all the amounts identified in Step 3, your statements should display the same final balance.
3. If a company is unaware of the exact amount of these fees, they may not be included in the company’s financial records and will only be seen when they receive their bank statement.
4. On the other hand, a small online store—one that has days when there are no new transactions at all—could reconcile on a weekly or monthly basis.

Read on to learn about bank reconciliations, use cases, and common errors to look for. Bank reconciliation isn’t just important for maintaining accurate business finances—it also ensures your customer and business relationships remain strong. Regular bank reconciliation double-checks that all payments have been accurately processed. This includes payments by customers to your company and payments from your company to employees, contractors, and other goods and services providers.